Climate change and reducing emissions top of political agenda

The Government's aim is to reduce CO2 emissions by 60% by 2050, and it has set a target for 10% of the UK's energy to come from renewable sources by 2010, and 20% by 2020. In 2005 only 4% of the UK's energy supply came from renewables.

Alex Illingworth, manager of the Halifax Ethical fund, comments on the renewable energy sector.

He said: "Governments around the world are backing clean energy as part of efforts to tackle climate change and the economic case for renewable energy, crucial for sustained growth in the sector, is gaining strength. We are now seeing environmental, political and, crucially, economic factors, coming together to create what I believe to be a genuine area of positive, long-term growth for investors.

Wind Power

The technology: The sector has grown rapidly over the past five years, and worldwide there is now nearly 75,000MW of installed capacity, mostly in America and Europe.
Pros: The wind is free and wind-generated electricity is one of the cheapest renewable energies available. Costs can be competitive with base load power electricity.
Cons: Wind power is not predictable and wind farms can be noisy. Production has been held back by a shortage of turbines and disputes with planning applications.
Companies in sector: Clipper Wind, Vestas, Gamesa, Suzlon
Manager's verdict: Returns from wind farms are attractive due to subsidies and therefore present some strong investment opportunities. Subsidies are also creating a bottleneck in the demand for turbines, which gives the turbine manufacturers pricing power and resulting rising returns.

Solar power

The technology uses photovoltaic cells to convert sunlight into electricity. An alternative is to use solar power to heat water.
Pros: Sunlight is free and there are few issues with planning permission.
Cons: There is a shortage of polysilicon, which is used to make solar cells.
Companies in sector include: MEMC Electronics, Renewable Energy Corp, Q-Cells, Solarworld, Suntech.
Manager's verdict: While costs still need to come down in order to make the technology more applicable, subsidies mean this is a thriving business. Demand is exceeding supply due to the overstretched polysilicon market, which gives pricing power to most players along the chain.

Biofuels

Biofuels are made from animal or vegetable matter. There are two types: biodiesel and bioethanol, which can be blended with oil-based fuels.
Pros: The technology is established and governments around the world are encouraging the use of biofuels as a way of reducing CO2 emissions from vehicles.
Cons: Biofuel companies are vulnerable to rising crop prices and falling oil prices. There are environmental concerns about the way some biofuel feedstocks are grown.
Companies in sector: Verbio, Aventine Renewable Energy, Pacific Ethanol, Archer Daniels.
Manager's verdict: Biofuels are being hailed as an answer to both climate change and energy security but it has become clear that they are not without their problems, and my view is that the sector in general has not yet come of age as an investment opportunity.

Fuel Cells

The technology converts hydrogen into electricity and water (in the form of steam).
Pros: The prospect of generating electricity from hydrogen without CO2 emissions is attractive, and the US government has allocated billions of dollars to research.
Cons: Fuel cells are expensive and hydrogen is not widely available as a fuel.
Companies in sector: Ballard Power Systems, FuelCell Energy, Ceres Power.
Manager's verdict: Costs are still on the high side and the path to profitability for many of these companies remains uncertain. I prefer large-scale, high-temperature fuel cells where pure hydrogen is not needed and efficiency can be much higher.

Wave and tidal power

The technology: converts energy from waves and sea currents into electricity.
Pros: The UK has one of the best tidal resources in Europe, tides are more predictable than wind and the UK has several potential sites.
Cons: Few marine power technologies have been developed past the large-scale testing stage.
Companies in sector: Most companies in the sector are private but include Ocean Power Delivery, Ocean Power Technologies, Aqua Energy Group.
Manager's verdict: High costs make wave power somewhat uninvestable at present but I believe there is scope for growth in this area and therefore it may be one to watch.